Agriculture / Agricultural operation is an integrated
activity of basic operations followed by subsequent
operation which is in conjunction with and in continuation
of the basic operation which are the effective cause of the
products being raised from the land.

(CIT vs. Raja
Benoy Kumar Sahas Roy (1957) 32 ITR 466)

AMALGAMATION

Effective date is date of transfer specified in the scheme,
from said date, income of amalgamating company is that of
amalgamated company.

(Marshall Sons &
Co. vs. CIT (1995) 223 ITR 809)

Expenditure on professional charges of solicitors in
connection with amalgamation is allowable business
expenditure in the light of finding that amalgamation was
necessary for smooth and efficient conduct of business.

(CIT. V. Bombay
Dyeing & Mfg. Co. Ltd. (1996) 219 ITR 521).

APPEALS

If law is amended retrospectively during the pendency of
appeal or references, the amended law will be applicable.

(CIT vs. Straw
Products Ltd. (1966) 60 ITR 156).

Appellate authority has power of enhancement but has no
power to enhance assessment by discovering new source of
income, which are neither mentioned in the return of the
assessee nor are considered by the ITO in the order appealed
from.

(CIT vs. Shapoorji
Pallonji Mistry (1962) 44 ITR 891)

However, according to later decision it is open to the
appellate authority to direct additions in respect of
matters not considered by the Assessing Officer. It can do
what the Income-tax Officer can do and also direct him to do
what he has failed to do.

(CIT V. Nirbheram
Daluram (1997) 224 ITR 610).

Tribunal has jurisdiction to decide on additional grounds
raised for first time in respect of question of law arising
from facts found by Income Tax Authority and having a
bearing on the tax liability of the assessee.

(National Thermal
Power Co. Ltd. vs. CIT (1998) 229 ITR 383)

It is open to assessee to challenge the levy of interest
under Section 139/215 if the liability to pay interest is
totally denied.

(Central Provinces
Manganese Ore Co. Ltd. V. CIT (1986 160 ITR 961).

APPEAL TO SUPREME
COURT

If revenue has not challenged the correctness of the law
laid down by the high court and has accepted it in the case
of one assessee, then it is not open to the revenue to
challenge its correctness in the case of the other assessee,
without a just cause.

(Berger Paints
India Ltd.— 266 ITR 99)

ASSESSMENT

Tax authorities exercising quasi-judicial powers must act in
a fair and not a partisan manner. Though it is their duty to
see that legitimate dues from the assessee should not remain
unrecovered but at the same time, they should not act in a
manner as might indicate that scales are weighted against
the assessee.

(CIT vs. Siman
Carves Ltd. (1976) 105 ITR 212)

A decision is a precedent on its own facts. Each case
presents its own features. The Income Tax Authorities and
Tribunals are supposed to apply the ratio of decision to a
facts of a particular case with due care.

(Maharashtra Mills
Ltd. vs. V.P.B. Desai (1975) 99 ITR 135)

The word ‘Assessment’ includes all proceeding starting with
the filing of the return or issue of notice and ending with
determination of tax payable by the assessee.

(S. Sankappa vs.
ITO (1968) 68 ITR 760)

Principle of natural justice must be observed while making
assessment.

(Dharkeshwari
Cotton Mills Ltd. vs. CIT (1954) 26 ITR 775)

Best judgment assessment must be an honest and fair estimate
of the income of the assessee and should have a reasonable
nexus to the available material and circumstances of the
case.

(Brij Bhushan Lal
Parduman Kumar vs. CIT (1978) 115 ITR 524)

Regular assessment means assessment made u/s 143(3) and 144
alone.

(Modi Industries
Ltd. vs. CIT (1995) 216 ITR 759)

However, as per Explanation 2 to Section 234B added later,
assessment made for the first time under Section 147/153A is
regarded as regular assessment for the purpose of that
section.

Action of Assessing Officer is not vitiated on account of
citing wrong section in notice or order when the action is
otherwise authorized by law.

(Isha Beevi V. TRO
(1975) 101 ITR 449)

The law which applies for the purpose of assessment is the
law as on the first day of the relevant assessment year. Set
off of unabsorbed losses etc. not available if the law does
not permit such setoff in the year in which the setoff is
sought to be availed.

(Reliance Jute &
Industries Limited (1979) 120 ITR 921)

Assessee not having permanent establishment in India. Income
derived from business in Malaysia not assessable in India.
DTA prevails over provisions of Income Tax Act.

(CIT vs. P.V.A.L.
Kulandagan Chettiar (2004) 267 ITR 654)

BINDING NATURE OF
ITAT DECISION

CIT(A) should follow the order of the ITAT, unless it is set
aside. It will amount to contempt of Tribunal order if the
same is not followed and results in undue harassment and
chaos in administration of tax laws.

(Kamalakshi
Finance Corp. AIR 1992 (SC) 711)

BINDING NATURE OF
BOARD CIRCULARS

Circulars issued by the Board in order to carry out the
assurance given by the Minister in Parliament to provide
relief in case of extreme hardship would be binding on all
officers and persons employed in the execution of the Act.
Benevolent circulars are binding on departmental officers.

(Navnitlal C.
Jhaveri vs. K.K. Sen (1965) 56 ITR 198)

Even if the directions contained in a circular issued by the
Central Board of Direct Taxes deviate from the provisions of
the Act, they are binding on ITO.

(Ellerman Lines
Ltd. vs. CIT (1971) 82 ITR 913)

Circulars issued by Central Board of Direct Taxes are
binding on departmental authorities.

(UCO Bank vs. CIT
(1999) 237 ITR 889)

BINDING PRECEDENT

Decision of a Division Bench of the Supreme Court is binding
on another Division Bench of the same or a smaller number of
judges.

(UOI vs. Raghubir
Singh (1989) 178 ITR 548)

Merely because special leave petition is dismissed, it
cannot be said that the order is upheld or otherwise.

(V.M. Salgoankar &
Bros. (P). Ltd. vs. CIT (2000) 243 ITR 383)

If there is conflict of two Supreme Court decisions, the
decision of the larger bench will prevail.

(CIT vs. Trilok
Nath Mehroratra (1998) 231 ITR 278)

Judicial discipline demands that one division bench of a
high court should ordinarily follow the judgments of another
division bench of that high court. In extraordinary cases,
it can be placed before the chief justice of the High Court
for constituting a larger bench.

(Asst. C.E.D. vs.
V. Devaki Anmol (1995) 212 ITR 395)

BUSINESS INCOME

Hire of assets for a period of 10 years with a view to
exploiting the same without intention of closing the
business - the rent received in such a case by the assessee
facing financial crises and temporarily suspending business
was assessed as business income.

(CIT vs. Vikram
Cotton Mills Ltd. (1988) 169 ITR 597)

The profit which assessee could have earned but did not earn
cannot be taxed. A trader cannot be obliged to earn maximum
profit.

(CIT vs. A. Raman
& Co. (1968) 67 ITR 11)

BUSINESS EXPENDITURE

S. 35CCA

Once assessee has fulfilled all the conditions laid down S.
35CCA for claiming the deduction of amount donated by it,
there was no obligation on the part of assessee to see that
the amount was utilised for the purpose for which it was
donated.

(CIT vs.
Chotatingrai Tea, 258 ITR 529 (SC))

S. 37

Interest on arrears of sales tax is compensatory in nature
and not penal and hence allowable.

(Lachmandas
Mathurdas vs. CIT, 254 ITR 799 (SC))

Amount of customs and excise duty paid on the goods lying in
the closing stock is allowable as a deduction u/s. 43B even
when the same was included in the valuation of closing
stock.

(Berger Paints
India Ltd. 266 ITR 99 (SC))

The expenditure allowable u/s 37 is an expenditure wholly
and exclusively (and not necessarily) incurred for the
purpose of business or profession and which is not (a)
capital expenditure (b) personal expenses, or (iii) an
allowance of the character described in Ss. 30 to 36. It is
therefore not required to be shown whether the expenses was
necessary to be incurred.

(CIT vs. Indian
Molasses Co. (P) Ltd. (1970) 78 ITD 474)

(J.K. Cotton Mfrs.
Ltd. vs. CIT (1975) 101 ITR 221)

(Sasoon J. David &
Co. Pvt. Ltd. vs. CIT (1979) 118 ITR 261)

Every businessman knows his interest best and department
cannot sit on judgement as to what expenditure an assessee
should incur and in what circumstances he should incur that
expenditure.

(CIT vs.
Dhanrajgiri Raja Narasingirji (1973) 91 ITR 544)

If the transaction is properly entered into as part of the
assessee’s legitimate commercial undertaking in order to
facilitate the carrying on of its business, it is immaterial
that a third party also benefits thereby —

(CIT vs. Chandulal
Keshavlal & Co. (1960) 38 ITR 601)

(Sasoon J. David &
Co. Pvt. Ltd vs. CIT (1979) 118 ITR 261)

Expenditure is what is paid out or away and is something
which is gone irretrievably.

(Indian Molasses
Co. P. Ltd. vs. CIT (1959) 37 ITR 66)

Statutory impost paid by an assessee as interest, damages or
penalty if found to be of composite nature, what is
allowable is amount which is compensatory in nature.

(Praksah Cotton
Mills P. Ltd. vs. CIT (1993) 201 ITR 684)

Interest charged u/s 36(2) of Bombay Sales Tax Act is held
to be of a composite nature and to the extent it is
compensatory in nature is allowable deduction

(Standard
Batteries Ltd. vs. CIT (1995) 211 ITR 444)

In the following cases, also the expenditure was allowed as
business expenses.

Expenditure due but not provided for in the accounts is
allowable expenditure if the assessee is following
mercantile system of accounting.

(Kedarnath Jute
Mfg. Co. Ltd. vs. CIT (1971) 82 ITR 363)

Interest on loan for purchase of capital asset allowed as
business expenditure.

(Bombay Steam
Navigation Co. Pvt. Ltd. vs. CIT (1965) 56 ITR 52)

(Amendment made by Finance Act, 2003 effective from 1.4.2004
on disallowance of interest till the capital asset is first
put to use be referred)

Expenditure for use of technical research and patents of
foreign collaborators.

(CIT vs. Ciba of
India Ltd. (1968) 69 ITR 692)

Lump sum payment for acquisition of know-how for improving
or updating process so as to result in higher yield of
product already being manufactured.

(Alembic Chemical
Works Co. Ltd. vs. CIT (1989) 177 ITR 377 (SC))

Expenditure on
replacement of certain parts.

(CIT vs.
Mahalakshmi Textile Mills Ltd. (1967) 66 ITR 710)

Amounts paid for use
of goodwill of firm.

(Devidas Vithaldas
& Co. vs. CIT (1972) 84 ITR 277)

Amounts paid for
development of roads owned by Govt.

(L.H. Sugar
Factory & Oil Mills vs. CIT (1980) 125 ITR 293)

(Lakshmi Sugar
Mills Co. Pvt Ltd. (1971) 82 ITR 376)

The decisions which
have taken contrary view are as under —

(Travancore Cochin
Ltd. vs. CIT (1977) 106 ITR 900)

(Arvind Mills Ltd.
vs. CIT (1992) 197 ITR 422)

Expenditure on renovation of building reconditioning of
machinery etc. after derequisitioning of a colliery.

(Kalyanji Mavji &
Co. vs. CIT (1980) 122 ITR 49)

Amount paid for
purchase of loom hours.

(Empire Jute Co. Ltd.
vs. CIT (1980) 124 ITR 1)

Where indivisible business is carried on by the assessee,
entire, expenditure will be allowed as deduction even if
some of the activities may result in tax free income.

(Rajasthan State
Warehousing Corpn. vs. CIT (2000) 242 ITR 450)

(S. 14A however has provided that expenditure in relation to
exempt income has to be disallowed. Section has been
inserted w.e.f. 1.4.62)

Provision for liability towards leave encashment was held to
be allowable.

(Bharat Earth
Movers vs. CIT (2000) 245 ITR 428)

(S. 43B however has been amended by Finance Act, 2001 which
provides that deduction has to be allowed only on payment
basis)

Penalty or fines levied for contravention of statutory
provisions were held to be not allowable.

(Haji Aziz & Abdul
Shakoor Bros vs. CIT (1961) 41 ITR 350)

Payments made which are opposed to public policy and/or
against any law held to be not allowable.

(Maddli
Venkataraman & Co. Pvt. Ltd. vs. CIT (1988) 229 ITR 534).

The Composite price towards purchase of securities cannot be
split up. Interest received for the period prior to
acquisition cannot be set off against cost of security and
is the nature of income.

(Vijaya Bank Ltd.
vs. Addl. CIT (1991) 187 ITR 541)

The first proviso to Sec. 43B clarifying that sums paid
after accounting year but before due date of return are
deductible was held to be retrospective effect.

Allied Motor Pvt.
Ltd,. vs. Union of India (1997) 224 ITR 677)

Amount paid for use of patents and designs for a definite
period with secrecy clause was allowed as expenditure being
in the nature of licence fees.

(CIT vs. I.A.E.C.
(Pumps) Ltd. (1998) 232 ITR 316)

Discount on Debentures was allowed proportionately as the
said expenditure has definite and continuing benefits over
specified periods.

(Madras Industrial
Investment Corpn. Ltd. vs. CIT (1997) 225 ITR 802)

Amounts paid to the workmen under a settlement agreement
upon closure of some of the units of the assessee was
allowed as revenue expenditure.

(K. Ravindranathan
Nair vs. CIT (2001) 247 ITR 278)

Expenditure incurred for public issue of shares is capital
expenditure.

(CIT vs. Kodak
India Ltd. (2001) 171 CTR (SC) 187)

An accrued liability does not become conditional or
contingent liability merely on the ground that it is
difficult to estimate value thereof.

(Calcutta Co. Ltd.
V. CIT (1959) 37 ITR 1)

The words ‘For the purpose of business’ are wider in scope
than ‘For the purpose of earning income’. Apart from day to
day running, even expenditure on modernization, preservation
of business, protection of assets, statutory dues, and many
other expenditure incidental to carrying on the business are
allowable and it is not necessary the same are incurred
voluntarily and not mandatorily.

Loss incidental to illegal business was held to be allowable
as incidental to such business.

(CIT vs. S.C.
Kothari (1971) 82 ITR 794)

Loss from dacoity in
a bank was held to be allowable.

(CIT vs. Nainitlal
Bank Ltd. (1965) 55 ITR 707)

Loss from embezzlements in the course of business was held
to be allowable.

(Badri Das Daga
vs. CIT (1958) 34 ITR 10)

If a transaction involves transfer of delivery notes and not
delivery of goods results in a loss was held to be
speculation loss.

(Deven port & Co.
Pvt. Ltd. vs. CIT (1975) 100 ITR 715)

Loss by theft of cash held directly for business operations
was held as allowable.

(Ramchandar
Shivnarayan vs. CIT (1978) 111 ITR 263)

Amounts paid by way of damages for breach of contract does
not amount to speculation loss.

(CIT vs. Shantilal
Pvt. Ltd. (1983) 144 ITR 57)

As to the priority of set off as to current year’s
depreciation and unabsorbed business loss, current year’s
depreciation is first deductible.

(CIT vs. Mother
India Refrigeration Ind. P. Ltd. (1985) 155 ITR 711)

BUSINESS CONNECTION

An Indian company canvassing orders for a non-resident
company had no right to accept orders on behalf of the
non-resident and contracts were entered into, delivery was
made and prices received outside India. It was held that
Indian Co. was not assessable as an agent of non-resident as
there was no business connection.

(CIT vs. R.D.
Agrawal & Co. (1956) 56 ITR 20)

Fees received by solicitors in London was held to be
taxable. It was held that expression “business connection”
includes professional connection. The connection must be
real and intimate but not casual.

(Barendra Prasad
Roy & Others vs. ITO (1981) 129 ITR 295)

CAPITAL GAIN

Redemption of preference shares amounts to sale of capital
asset and the amount received on such redemption would be
chargeable to tax as capital gain.

(Anarkali Sarabhai
vs. CIT (1997) 224 ITR 22)

Section 52(2) can be invoked only where the consideration
for the transfer of a capital asset has been understated by
the assessee. It has no application in case of genuine
transaction where the consideration received has been
correctly declared or disclosed by him.

(K. P. Varghese
vs. ITO (1981) 131 ITR 597)

(Section 52 has been deleted by the finance Act 1987 w.e.f.
1.4.88 but the principles laid down would be applicable in
similar circumstances)

(a)

“Full value of the consideration” does not mean the market
value of the asset transferred but the price bargained for
by the parties to the sale etc.

(CIT vs. George Handerson &
Co. Ltd. (1967); 66 ITR 622)

(b)

In case of sale for a price, there was no question of any
market value, unlike in the case of an exchange. In case of
sale, all that one had to see was what was the consideration
bargained for.

(CIT vs. Gillanders Arbuthnot
& Co. (1973) 87 ITR 407)

Year of taxability : The entries in the account books of the
assessee are irrelevant for the purpose of determining the
date when the sale or transfer took place.

(Alapati Venkataramiah vs. CIT
(1965) 57 ITR 185)

Reduction of Share Capital :- Amount distributed to
shareholders as a result of reduction of capital will be
assessable as dividend to the extent it is attributable to
accumulated profit and the balance will be assessable as
capital gain.

(CIT vs. G. Narsimhan (1999)
256 ITR 327)

General Principle :- In computation of capital gains/loss,
the commercial principles will have to be applied.

(Miss Dhan Dadabhoy Kapadia
vs. CIT (1967) 63 ITR 651)

Transfer : Expression “Extinguishments of any rights
therein” in section 2(47)(ii) is not limited to such
extinguishments on account of transfer but extents to mean
extinguishments of rights independent of or otherwise than
on account of transfer.

(CIT vs. Mrs. Grace Collis
(2001) 248 ITR 323)

In case of Firm / Partner :- Excess amount received by the
assessee on retirement from the firm is not assessable to
capital gains.

(CIT vs. R. Lingmallu Raghu
Kumar (2001) 247 ITR 801)

Transaction to which provisions of section 45 cannot be
applied must be regarded as never intended to be the subject
of the charge. The provisions relating to capital gain does
not include an asset in the acquisition of which no cost at
all can be conceived.

(CIT vs. B.C. Srinivasa Shetty
(1981) 128 ITR 294)

Capital gain on sale of agricultural land situated in
municipal limits is taxable under the Income tax Act.

Assessee is liable to pay tax u/s. 46(2) on market value of
Agricultural land received from the company in liquidation.
For the purpose of s. 46(2). what is not a capital asset may
yet be an asset.

(N. Bagavathy Ammal vs. CIT,
259 ITR 678 (SC))

CASH CREDITS

Where loan confirmation filed show GIR Nos. or PA Nos. of
lenders, the identity of the lenders is established and A.O.
cannot add such cash credits as income without further
inquiries.

(CIT vs. Orissa
Corporation Pvt. Ltd. (1986) 159 ITR 78)

Every unsatisfactory explanation about the source of
investment do not invite addition u/s 69, as the provisions
of S.69 are discretionary.

(CIT vs. Smt. P.K.
Noorjahan (1999) 237 ITR 570)

(CIT vs. Stellar
Investment Ltd.)

DEDUCTION

A provision in statute granting incentives for promoting
economic growth and development has to be construed and
interpreted liberally so as to advance the objective of the
provision.

(CIT vs. Bajaj
Tempo Ltd. 62 Taxman 480)

A branch, unit or establishment of an Indian company which
is situated in a foreign country and is doing business there
cannot be regarded as a “foreign enterprise” within the
meaning of section 80-O of Income-tax Act.

Providing diverce services to a foreign company in a hotel
amounts to provision of technical services.

(CBDT vs. Oberoi
Hotels (India) P. Ltd. (1998) 97 Taxman 453 (SC))

In case of receipt of brokerage by a reinsurance agent in
India from the gross premium before remitting the net
premium to his foreign principles will tantamount to receipt
of foreign exchange received in India.

(J. B. Boda & Co.
(P) Ltd. vs. CBDT (1996) 89 Taxman 311)

Assessee engaged in the business of hatcheries are neither
industrial undertaking nor engaged in business of producing
articles or things.

A receipt from sale of import entitlement would not
constitute profit and gains derived from assessee’s
industrial undertaking and could not be included in income
of the assessee for computing deduction u/s 80HH.

(CIT vs. Sterling
Foods 237 ITR 579)

All materials extracted from earth are covered by provisions
of section 80HHC(2)(b)(ii) and hence assessee exporting
granite is not entitled to benefit of deduction u/s 80HHC.

(Sterecraft
Enterprises vs. CIT (1999) 237 ITR 131)

Food packets prepared from raw materials such as cereals,
pulses, vegetables etc. cannot be regarded as commercially
distinct commodity and cannot be regarded as manufacture or
produced article or thing within the meaning of section 80J
of the Act.

(Indian Hotels Co.
Ltd. vs. ITO (2000) 245 ITR 538

Assessee engaged in business of rearing and development of
chicks into broilers could not be said to be “Manufacturing
a product”

(Indian Poultry
vs. CIT 250 ITR 664)

Cutting and Polishing of uncut raw diamonds does not amount
to manufacture or production of article or thing. However,
Explanation 4 to section 10A considers cutting and polishing
of precious/ semiprecious stones as ‘manufacture’.

(CIT vs. Gem India
Manufacture Co. (2001) 249 ITR 307)

Conversion of chicory root into chicory powder does not
amount to manufacturing article or thing. Assessee not
entitled to deduction u/s 80HH, 80I & 80J.

(Sacs Eagles
Chicory (2002) 255 ITR 178)

The word “derived from” in section 80HH would mean direct or
immediate nexus with the assessee’s industrial undertaking.
Interest derived by industrial undertaking on deposit with
the electricity board would not qualify as income “derived
from” industrial undertaking.

(CIT vs. Pandian
Chemicals Ltd. 262 ITR 278)

For the purpose of computing deduction under section 80HHC,
for aggregation of profits of trading/manufacturing
activities, loss in one of them is not to be ignored. Also
section 80AB has overriding effect over other provisions for
deductions.

(IPCA Laboratories
Ltd. V. DCIT (2004) 266 ITR 21)

Manufacture of articles and things will not cover
construction of immovable like dam.

(CIT V. N.C.
Budharaja & Co. (1993) 204 ITR 412)

DEPRECIATION

Books of account may be kept in foreign currency but
depreciation will have to be calculated in Indian currency
at the point of time of acquisition of asset.

(CESL Ltd. vs. CIT
(1998) 233 ITR 50)

Depreciation must be allowed as deduction not only under
Income Tax but also under accountancy principles, otherwise
these will not be true picture of the real income of the
business.

(CIT vs. ALPS
Theatre (1967) 65 ITR 377)

Roads and Roadways adjunction to building within the factory
area are building for the purpose of section 32 (CIT vs.
Gwalior Rayon Silk Manufacturing Co. (1992) 196 ITR 149)
Where there was no other construction except the roads, it
cannot be said that the roads by themselves constitute
buildings.

(Indore Municipal
Corporation vs. CIT (2001) 247 ITR 803)

“Building owned by the assessee” would mean person
exercising dominion over property and having right to use
and occupy it in his own right would be owner of building.
The registration of deed is immaterial for determining
ownership.

(Mysore Minerals
Ltd. vs. CIT (1999) 239 ITR 775)

Technical know-how in form of drawings, designs, charts,
plans etc. are to be considered as Plant.

(Scientific
Engineering House (P) Ltd. vs. CIT (1986) 157 ITR 86)

Nursing home building held as plant. However, definition of
‘plant’ in section 43 amended to exclude buildings.

(CIT vs. Dr. B.
Venkata Rao (2000) 111 Taxman 635)

“Actually Allowed” would means allowance was actually given
effect to.

(CIT vs. Straw
Products Ltd. (1966) 60 ITR 156)

Hotel Building is not
a plant

(Abod Hotels India
(P) Ltd. (2001) 119 Taxman 429)

Theatre Building is
not a plant

(CIT vs. Raiban &
Sons 251 ITR 881)

Depreciation claim is optional, it cannot be thrust upon
(However Finance Act 2001 has amended section 32 and made
the claim of depreciation mandatory).

(CIT vs. Mahendra
Milks (2000) 243 ITR 56)

Subsidy received from government not to be deducted from
cost of assets. However, explanation 10 to section 43(1)
requires deduction of subsidy in specified cases.

(CIT vs. P. J.
Chemicals Ltd. (1994) 210 ITR 830)

DIVIDEND

If payment under section 2(22)(e) is treated as a deemed
dividend and is required to be so treated to the extent that
the company possesses accumulated profits, such payment must
be considered as adjusted against the companies, accumulated
profits for the purpose of section 2(22)(e).

(CIT vs. G.
Narsimhari (1999) 236 ITR 327)

Definition of “dividend” as provided in section 2(22) would
be applicable to all provisions wherever it contains the
term “dividend”.

(CIT vs. Mysodet
(P) Ltd. (1999) 237 ITR 35)

For the purpose of section 2(22), the word shareholder would
mean registered shareholder and not a beneficial owner of
the share.

(Rameshwarlal
Senwarmal vs. CIT (1980) 122 ITR 1)

Even if the loan or advances ceased to be outstanding at the
end of previous year, it is still deemed dividend to the
extent of accumulated profit possessed by the company.

(Miss P. Saroda
vs. CIT (1998) 96 Taxman 11)

“Accumulated Profits” occurring in section 2(22) means
actual profits in the commercial sense and not assessable or
taxable profit liable to tax as income under the Act.

(P.K. Badiani vs.
CIT (1976) 105 ITR 642)

The language of section 57(iii) is such that it is not
necessary that any income should have been earned as a
result of the expenditure.

(CIT vs. Rajendra
Prasad Mody (1978) 155 ITR 519)

Interim Dividend is such that it gives no right to
shareholders to receive it merely on passing of resolution
by board of directors whereas when dividend is declared by
company in general meeting vested rights accrue to
shareholders.

(CIT vs. Express
Newspapers Ltd. (1998) 96 Taxman 548)

DIVERSION OF INCOME

The nature of obligation determines whether there is
diversion of income. If no charge is created on the property
it will be treated as application of income and not
diversion of income by overriding title.

(CIT vs. Sitaldas
Tirathdas (1961) 41 ITR 367)

DOUBLE TAXATION

When the company had been made liable to tax u/s. 104, on
income it did not mean that the amount, when paid as income
to the shareholder, could not be taxed as income in the
hands of the shareholders, as the character of amount
changed.

(ITO vs. S. Radha
Krishnan, 254 ITR 561 (SC))

DOUBLE TAXATION
RELIEF

DTA entered into with foreign country will operate even if
it is inconsistent with the provision of the Act, once it is
signed and notified.

(Union of India
vs. Azadi Bachao Andolan 263 ITR 706)

Provisions of sections 4 & 5, which provides for taxation of
global income, are subject to provisions of DTAA. Where tax
liability is imposed by the Act, the DTAA may be resorted to
either for reducing the tax liability or altogether avoiding
the tax liability. In case of any conflict, the provisions
of DTAA would prevail over the Act.

(CIT vs. P.V.A.L.
Kulandagan, 267 ITR 654 (SC), 137 Taxman 460 (SC))

Where the expression is not defined in the DTAA the
expression defined in the Act would be attracted.

(CIT vs. P.V.A.L.
Kulandagan, 267 ITR 654 (SC), 137 Taxman 460 (SC))

HUF

Burden of proof is on the assessee to establish that the
property is joint family property.

(Anilkumar Roy
Choudhary vs. CIT (1976) 102 ITR 12)

Physical division of property is a pre-requisite in order to
claim partition in respect of any property under section 171
of the Act. (CIT Venugopal Irani (1999) 239 ITR 514)

Widows can form
H.U.F. (CIT vs. Veerappa Chettiar (1970) 76 ITR 467)

One Coparcener can
form HUF (Gowli Budanna vs. CIT (1966) 60 ITR 293

A single individual cannot form HUF. A family means a group
of persons.

(C. Krishna Prasad
vs. CIT (1974) 97 ITR 493)

Gift made out of self-acquired property to son cannot be
construed as HUF property of the son except it is
specifically gifted to HUF of son.

(M. P.
Periakaruppan Chettiar vs. CIT (1975) 99 ITR 1)

Partition of HUF properties can be made by father even if
there are minor coparceners. (Apoorva Shantilal Shah vs.
CIT (1983) 141 ITR 558)

A Hindu father can make a gift of ancestral immovable
property within reasonable limits, keeping in view of the
total extent of the property held by the HUF in favour of
his daughter at the time of her marriage or even long after
her marriage.

There is a fundamental, though unwritten, axiom that no
legislature could have at all intended a double deduction in
regard to the same business outgoing and if it is intended,
it should be clearly expressed.

(ESCORTS LTD. vs.
U.O.I. (1993) 199 ITR 43)

Decision rendered by larger bench of the Supreme Court will
be binding on a similar or smaller bench and in order that
such decision is binding, it is not necessary that it should
be a decision rendered by the full court or a constitution
bench of the Supreme Court.

(Union of India
and another vs. Raghubir Singh (1988) 178 ITR 548)

Facts should be viewed in natural perspective, having regard
to the compulsion of the circumstances of a case. Where it
is possible to draw two inferences from the facts and where
there is no evidence of any dishonest or improper motive on
the part of the assessee, it would be just and equitable to
draw such inferences in such a manner that would lead to
equity and justice. Too hypertechnical or legalistic
approach should be avoided in looking at a provision which
must be equitably interpreted and justly administered.

(Saroj Aggrawal
vs. CIT (1985) 156 ITR 497)

INCOME TAX

The expression “Income Tax” used in the Finance Act and
Income Tax Act includes surcharge and additional surcharge
wherever provided in the Act.

(CIT vs. K .
Srinivasan (1972) 83 ITR 346)

An Income Tax liability crystallizes on the last day of the
previous year relevant to an assessment year under the
Income Tax Act.

(CWT vs. K. S. N.
Bhatt (1984) 145 ITR 1)

It is fundamental rule of the law of taxation that unless
otherwise expressly provided income cannot be taxed twice.

(Laxmipat Singhnia
vs. CIT (1969) 71 ITR 291)

The Finance Minister’s speech can be relied upon to throw
light on the object and purpose of particular provisions
introduced in the Finance Bill.

(Kerala State
Industrial Development Corp. vs. CIT, 259 ITR 51 (SC))

Rule of interpretation would come into play only if there is
any doubt with regard to the express language used. Where
the words are unequivocal there is no scope for importing
the rule of liberal interpretation.

CIT vs. Pandian
Chemicals Ltd. 262 ITR 278

INCOME

Dividend income earned on shares held as stock-in-trade is
to be treated as business income.

(Brook Bond & Co.
Ltd. vs. CIT (1986) 162 ITR 373)

Income tax is tax on real income; i.e., profits computed on
commercial principles.

(Poona Electricity
Supply Co. Ltd. vs. CIT (1965) 57 ITR 521)

Unclaimed trade deposit written back to Profit & Loss
Account is assessable as income.

(CIT vs. T.V.S.
Sundaram Iyengar & Sons Ltd. (1996) 222 ITR 344)

Principles of real
income not applicable to capital expenditure.

(CIT vs. Jalan
Trading Co. Ltd. (1985) 155 ITR 536)

For determination of
income, entries in books of account are not conclusive.

(SBI vs. CIT
(1986) 157 ITR 67)

If the income has not really accrued, then the same cannot
be taxed. What is taxable should be real and not
hypothetical. Hypothetical income even if credited in the
books may not be taxable. Notwithstanding specific mode of
computation provided by the law, the commercial principle
and practice should not be ignored.

(Miss Dhun Dadabhoy Kapadia
vs. CIT, 63 ITR 651 (SC))

(State Bank of Travancore vs.
CIT, 158 ITR 102 (SC))

(CIT vs. Shiv Prakash Janak
Raj & Co. P. Ltd., 222 ITR 583 (SC))

(CIT vs. Shoorji Vallabhdas &
Co., 46 ITR 144 (SC))

(Morvi Industries Ltd., 82 ITR
835 (SC))

(Godhra Electricity Co. Ltd.
vs. CIT (1997) 225 ITR 746 (SC))

(Poona Electric Supply Co.
Ltd. vs. CIT (1965) 57 ITR 521 (SC))

Power subsidy which went towards reduction of electricity
bills of assessee could not be treated as a capital receipt.
It is a revenue receipt covered u/s. 28(iv).

(CIT vs. Rajaram
Maize Products, 251 ITR 427 (SC))

INTEREST

Section 220(2) could not be invoked to demand any interest
from the assessee for the period commencing with refund of
tax consequent upon first appellate order till tax were
finally paid after disposal of reference by High Court.

(Amendment to sec.
234A/B and 140 A by Finance Act, 2001 be referred.)

Levy of interest u/s
234 A/B/C is mandatory.

(CIT vs. Anjum
M.H. Ghaswala (2001) 252 ITR 1)

INCOME TAX APPELLATE
TRIBUNAL

The President may constitute a “Special Bench/larger Bench
either suo motu or an application being made to him to
decide any important point. Short adjournment ought to be
granted even if eleven adjournments already granted.

(ITAT vs. Deputy
Commissioner of Income Tax (1996) 218 ITR 275)

The word ‘thereon’ in sec. 254 (1) restricts the
jurisdiction of the Tribunal to the subject matter of the
appeal.

(Hukumchand Mills
Ltd. vs. CIT(1967) 63 ITR 232)

Tribunal may allow the assessee to urge grounds not set
forth in the memorandum of appeal.

(CIT vs. S.
Nelliappan (1967) 66 ITR 722)

On the basis of the judicial decision given it is found that
non taxable item is taxed or deduction is denied, additional
ground can be raised before the Tribunal for the first time,
in an appeal pending before it so long as the relevant facts
are on record in respect of that item.

(National Thermal
Power Co. Ltd. vs. CIT (1998) 229 ITR 383)

INCOME FROM OTHER
SOURCES

Interest on amount borrowed to pay taxes and annuity
deposits is not expenditure incurred wholly and exclusively
for purposes of earning income and hence not deductible.

(Smt. Padmavati
Jaikrishna vs. CIT (1987) 166 ITR 176)

Accounting practice cannot override sec.56 or any other
provision of the Act.

Deduction u/s 23(2) allowable to each co-owner separately
where house property is owned by two or more persons whose
shares are defined.

(CIT vs.
Bijoykumar Almal (1995) 215 ITR 22)

Owner must be that
who can exercise rights in his own right.

(R.B. Jodhamal
Kuthiala vs. CIT (1971) 82 ITR 570)

For the purposes of Sec. 22 ‘owner’ is a person who is
entitled to receive income in his own right even though no
registered documents as required u/s 54 of the Transfer of
Property Act or the Registration Act are executed.

(CIT vs. Podar
Cement Pvt. Ltd. (1997) 226 ITR 625)

MAT

Assessing Officer does not have jurisdiction to go behind
net profits shown in the profit and loss account except to
the extent provided in Explanation to s. 115J.

(Apollo Tyres vs.
CIT, 255 ITR 273 (SC)

Where an assessee has been made liable to pay MAT, the
deduction which are permissible under the provisions of the
Act should be considered to have been allowed and assessee
should be allowed to carry forward only balance of
unabsorbed losses, depreciation, investment allowance, etc.

Closing stock of raw material is
to be valued at cost net of MODVAT element.

(CIT vs. Indo Nippon Chemicals
Co. Ltd. 261 ITR 275)

If the method of accounting followed does not disclose true
picture of the profit, authorities are duty bound to reject
the method of accounting even if it is followed
consistently.

(CIT vs. British Paints Ltd.
(1991) 188 ITR 44)

Where, on dissolution following death of one partner,
assessee-firm was reconstituted with the remaining partners
without discontinuation of business, closing stock of firm
is to be valued at cost or market price whichever is lower.

(Sakthi Trading Co. vs. CIT,
250 ITR 871 (SC))

MODVAT credit available to assessee is not income which was
liable to tax. Adopting gross method for purchase and net
method for valuing unconsumed stock is not permissible.

(CIT vs. Indo Nippon Chemicals
Co. Ltd., 261 ITR 275 (SC))

MUTUAL CONCERN

Principle of mutuality also applies to income from house
property. Club being mutual concern not liable to tax under
section 22.

(Chamsford Club
vs. CIT (2000) 243 ITR 89)

Under Income-Tax Act, “Income, Profits or Gain” earned,
‘arising’ or accruing to a person is taxed. Where a group of
persons come together and contribute to a common fund for
the financing of the venture or object, having no relation
or dealing with outside parties, then any surplus arising
out of the activity cannot be regarded as income or profit
chargeable to tax. There must be complete identity between
the contributors and the participators.

(CIT vs. Bankipur
Club vs. (1997) 226 ITR 97)

INCOME ACCRUAL

Income can be said to be accrued or earned only when it
acquires a debt and right to receive the payment in assessee
favour.

(E.D. Sassoon &
Co. Ltd. vs. CIT (1954) 26 ITR 27)

Original compensation accrues on date of award by collector,
but enhanced compensation accrues only after adjudication by
final court.

Levy of penalty u/s. 271(1)(c) and prosecution u/s. 276C are
simultaneous and, therefore, once penalties are cancelled on
the ground that there is no concealment, quashing of
prosecution u/s. 276C is automatic.

(K.C. Builders vs.
ACIT, 135 Taxman 461 (SC))

Penalty is not imposable if there is no conscious breach of
law.

(Hindustan Steel
Ltd. vs. State of Orissa (1972) 83 ITR 26)

In respect of penalty u/s 271(1)(c) for concealment of
income, the law operating as on the date of filing return is
applicable to the assessee.

(Brijmohan vs. CIT
(1979) 120 ITR 1)

The law applicable for imposition of penalty would be the
law as inforce at the time when the original return is filed
for the assessment year in question and not the law as it
stands on the date on which return in response to S.148 was
filed.

(CIT vs. Omkar
Saran & Sons (1992) 195 ITR 1(SC))

Penalty u/s 271(1)(c ) is not leviable if returned income
and assessed income is loss.

(CIT vs. Prithipal
Singh & Co. (2001) 249 ITR 670)

(Law has been amended in Cl.(a) to expl. 4 to
Sec.271(1)(c)by Finance Act, 2002 w.e.f. 1.4.03 and thus
this decision is overruled)

If an assessee agrees to addition before detection of
income, penalty u/s 271(1)(c) cannot be levied.

(Shadilal Sugar &
General Mills (1987) 168 ITR 705)

(CIT vs. Suresh
Chandra Mittal (2001) 251 ITR 9)

Penalty imposed for contravention of the provisions of the
C.S.T. Act which is not compensatory in nature could not be
allowed as deduction.

(Swadesh Cotton
Mills Co. Ltd. vs. CIT (1998) 233 ITR 199)

If there is a conflict between the decisions of Supreme
Court as to allowability of rent paid for land taken on
lease for mining then it is referred to larger Bench for
resolving the conflict.

(Aditya Minerals
(P) Ltd. vs. CIT (1999) 236 ITR 39)

Interest on arrears of sales tax in computing the assessee’s
income is allowed.

(Lachmandas
Mathuradas vs. CIT (2002) 254 ITR 799)

PROSECUTION

Prosecution u/ss. 276 C, 277 & 278 — Each of these sections
provide for imprisonment with fine. Court ruled that company
cannot be prosecuted and leaves no choice to court to impose
only fine. However, see amendment in section 278B overruling
this from 1-10-04.

(CIT vs. Velliappa
Textiles Ltd. (2003) 263 ITR 550)

Where appeals against reassessments on the basis of which
prosecution has been initiated u/ss. 276C, 277 and 278, is
pending and High Court held that prosecutor proceedings to
be stayed till the disposal of such appeals, High Court’s
interim order is to be up held.

(CIT vs. Bhupen
Champaklal Dalal (2001) 248 ITR 830)

Where penalty for concealment imposed on the basis of
additions to income is cancelled on the basis of Tribunal
order, quashing of prosecution is automatic.

(K.C. Builders vs.
ACIT (2004) 265 ITR 562)

Failure to file Return in due time — Permissibility
u/sub-section (4) for filing return before assessment does
not extend time prescribed for filing return under sec.
139(i) and 139(2).

(Prakash Nath
Khanna & Another vs. CIT (2004) 266 ITR 1)

REASSESSMENT

Notice for reassessment is illegal if it is issued after
four years from the end of the assessment year of the
original assessment made u/s 143(3).

(CIT and others
vs. Foramer France – 264 ITR 566)

RECTIFICATION OF
MISTAKES

What can be rectified u/s 154 is mistake apparent from
record and that debatable issues cannot be rectified.

(T.S. Balaram vs. Volkant
Bros. (1971) 82 ITR 50)

If sufficient data is available on record, ITO can grant
deduction which had not been claimed earlier.

(Anchor Pressings P. Ltd. vs.
CIT (1986) 161 ITR 159)

Even a mistake of law which is glaring one and obvious can
be rectified.

(ITO vs. Bombay Dyeing & Mfg.
Co. Ltd. (1958) 34 ITR 143)

Point which is not examined on fact or in law cannot dealt
with as mistake apparent from record.

(CIT vs. Hero Cycles (P)
Ltd.(1997) 228 ITR 463)

If there is subsequent decision of Supreme Court, order can
be rectified.

(Poothomdu Plantates (P) Ltd.
vs. Agri ITO (1996) 221 ITR 557)

RECOVERY

Garnishee notice cannot be issued to Stock Exchange in
respect of arrears of its member since no amount was due to
the members by the stock exchange and membership right is
not a property of assessee. ( Stock Exchange Ahmedabad
vs. ACIT, 248 ITR 209 (SC))

RE-OPENING OF
ASSESSMENTS

Information contemplated u/s 147(b) must be from external
sources and it includes information as to true and correct
state of law.

(V. S. Jaganmohan Rao vs. CIT
(1970) 75 ITR 373)

The word “omission or failure to disclose fully and truly
all material facts necessary for his assessment for that
year”, casts duty on assessee to disclose fully and truly
all material facts necessary for the assessment. It is the
duty of the Assessing Officer to draw the correct conclusion
from them. If the Assessing Officer fails in his duty, he
cannot reopen the case u/s 147(a).

The AO, who acted on the basis of jurisdictional High
Court’s decision, cannot be said to have acted erroneously
so as to give power to CIT u/s. 263.

(CIT vs. G.M. Mittal Stainless Steel P. Ltd., 130 Taxman
67 (SC))

The commission has power u/s 263 to revise an order passed
by the Income Tax Office pursuant to the direction of the
inspecting Assistant Commissioner u/s 144B.

(T. N. Civil Supplies Corporation Ltd. vs. CIT 260 ITR
82)

Search & Seizure

The provisions relating to search
and seizure in Sec.132 and rule 112 cannot be regarded as
violative of Sec. 19(1)
(f) or 19(1)(g) of constitution.

(Pooranmal vs. DI(Inv.)(1974) 93 ITR 505)

(Bhupendra Ratilal Thakkar vs. CIT (1976) 102 ITR 531 (SC))

Sec.132 does not confer any arbitrary authority upon the
revenue officers. Since exercise of the power are serious
invasion upon the rights, privacy and freedom of the
taxpayer, the power must be exercised in accordance with the
law.

(ITO vs. Seth Bros. (1969) 74 ITR 836)

Income tax department could not issue a search warrant and
seize the money seized by the excise authority or police
authority.

(ITO vs. Bafna Textile (1987) 164 ITR 281)

On a construction of the section and the context in which
the words ‘search’, ‘possession’ and ‘seizure’ have been
used in the said section, there cannot be an order in
respect of goods or moneys or papers which are in the
custody of another department.

Extending the retention of books and documents beyond 180
days without communication is invalid.

(CIT vs. Oriental Rubber Works. (1984) 145 ITR 477)

Information from CBI that cash was found in possession of
individual is not sufficient for authorising search and
consequently search and block assessment is not valid.

(Union of India vs. Ajit Jain (2003) 260 ITR 80.)

SETTLEMENT
COMMISSION

An application u/s 245 C is maintainable only if it
disclosed income which has not been disclosed before
Assessing Officer.

(CIT vs. Express Newspaper Ltd. (1994) 206 ITR 443)

Settlement Commission is a Tribunal.

(CIT vs. B.N. Bhattachargee (1979) 118 ITR 461)

High court or Supreme Court can interfere with an order of
settlement commission, if order of settlement commission is
contrary to provisions of the Act and such contravention has
prejudiced assessee.

(Jyotendrasinhji vs. S.I. Tripathi (1993) 201 ITR 611)

Commission’s jurisdiction u/s 245 D(4) is confined to the
matters covered by application before it.

(CIT vs. Paharpur Coolling Towers (P) Ltd. (1996) 85 Taxman
357.)

Income Tax Authorities are free to proceed in the prescribed
manner till the commission decides to proceed with the
petition.

(CIT vs. Hindustan Bulk Carriers (2003) 259 ITR 449)

It is not open to criminal court to go behind the order
passed by Settlement Commission.

(Nirmal & Navin (P) Ltd. vs. D. Ravindran (2002) 255 ITR
514)

The Settlement Commission does not have power to reduce or
waive interest statutorily payable u/ss 234A, 234B and 234C
except to the extent of granting relief under circulars
issued by the Board u/s 119.

Interest for default in furnishing Return, payment or
deferment of advance tax is payable till commission allows
application for settlement.

Commission to examine whether assessee has made out a case
u/s 220(2A) of the Act.

(CIT vs. Damani Bros. (2003) 259 ITR 475)

SET OFF AND CARRIED
FORWARD OF LOSS

Provision of s.79 denying set off in case of change in 51%
voting power apply only to a business loss and not to the
unabsorbed depreciation.

(CIT vs. Shri Subhulaxmi Mills Ltd., 119 Taxman 281 (SC))

SPECULATION LOSS

Units of UTI cannot be considered as ‘shares’ and therefore
the business of buying and selling of units can not be
considered as speculation business for the purpose of s. 73.

(Apollo Tyres Ltd. vs. CIT, 255 ITR 273(SC))

When legal heirs of deceased proprietor entered into
partnership and carried on same business in same premises in
same trade name, there is succession as contemplated u/s.
78(2), and firm entitled to carry forward and set off of
deceased’s loss against its income.

(CIT vs. Madhukant M. Mehta, 124 Taxman 130 (SC))

STAY OF RECOVERY

Tribunal can grant stay u/s 254.
(M. K. Mohammed Kundri 71 ITR 815)

STAY ORDERS

Tribunal has power to stay recovery of tax. The powers are
incidental and ancillary.

(ITO vs. M.K. Mohammed Kunhi (1961) 71 ITR 815)

TAX DEDUCTION AT
SOURCE

The deduction of tax u/s 194 C has to be from the whole
amount of contract and not merely on income component of the
amount. The word ‘any work’ occurring in sec.194C means any
work and not restricted to a ‘works contract.

(Associated Cement Co. Ltd. vs. CIT (1993) 201 ITR 435)

Section 194C, before insertion of Explanation III, was
inapplicable to transport contract.

(Birla Cement Works vs. CBDT, 248 ITR 216 (SC))

TAX PLANNING

Colourable devices cannot be part of tax planning and it is
wrong to encourage or entertain the belief that it is
honourable to avoid the payment of tax by resorting to
dubious methods. Tax planning may be legitimate provided it
is within the framework of law.

(McDowell & Co. vs. CTO (1985) 154 ITR 148)

If the meaning of documents on record is clear, the
documents cannot be ignored merely on the ground that they
lead to tax avoidance.

(CWT vs. Arvind Narottam (1988) 173 ITR 479)

An act which is otherwise valid in law cannot be treated as
nonest merely on the basis of some underlying motive
supposedly resulting in some economic detriment on prejudice
to the national interests.

(Union of India vs. Asadi Bachao Andolan (2003) 263 ITR 706)

A.O.P.B.O.I.

Where persons do not combine in a joint enterprise to
produce income cannot be assessed as A.O.P.